The Trouble With Barbie

By

Jack Hough

Aug. 23, 2014 2:20 a.m. ET

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Barbie is having a rough year, and it's not because little girls have stopped wanting toys. My Little Pony, for example, is galloping off the shelves. It's made by
Hasbro,
which is the No. 2 U.S. toy company and is gaining on leader
Mattel.
Over the past year, Hasbro shares are up 16%, while those of Mattel have lost as much. Hasbro is expected to lift its earnings per share by 14% this year, versus a 17% plunge for Mattel—in part because of double-digit sales declines for Barbie so far this year. Forecasts for next year's earnings have been rising in Hasbro's case, and falling for its rival.

Investors should stick with what's working. Look for Hasbro (ticker: HAS) shares to return 20% over the next year, including a 3.3% dividend yield. Wait for improvement at Mattel (MAT).

One key to Hasbro's success has been its ability to adapt brands for as many uses as Mr. Potato Head has faces. Transformers are shape-shifting battle figures for boys ages 4 to 10, but there are kindlier firefighting bots for younger brothers and shoot-'em-up videogames for teens. All get a boost from Hasbro's cartoon and movie operations. "Customers want toys that are supported by storytelling," Chief Executive Brian Goldner told Barron's this past week. "And they want to be able to move among different categories of play, analog and digital."

Illo: Dan Picasso for Barron's

In addition to My Little Pony and Transformers, Hasbro identifies its "franchise" brands as Nerf (including Nerf Rebelle crossbow sets for girls), Play-Doh, Monopoly, Littlest Pet Shop, and Magic: The Gathering (a role-playing card game with a movie in the works). Hasbro also owns Playskool toys for preschoolers and controls scores of aging but familiar brands, like Twister and Battleship. And it licenses brands from Disney, including its Marvel and Star Wars properties, and others. This year, total sales are expected to climb 6.7%, to $4.4 billion, versus a nearly 1% decline at Mattel, to $6.4 billion.

Much of that growth is coming from overseas. Last quarter, North American sales dipped 1.6%, to $383 million, and international rose 16.6%, to $396.8 million (led by 30% growth in emerging markets). Entertainment and licensing (Tonka Truck T-shirts and such) increased 35%, to $47.7 million. By category, Hasbro sales of boys' products jumped 32%, to $336 million, driven by toy demand from this summer's Transformers movie. Girls' sales rose 10%, to $164 million, on strength from Littlest Pet Shop, Nerf Rebelle, and DohVinci craft sets. Games sales were down 12%, to $226 million, which management attributes to a drawing down of inventories at U.S. retailers, part of a shift to just-in-time delivery. Preschool sales fell 4%, to $104 million on tough comparisons with last year's Big Hugs Elmo.

THERE'S REASON TO BELIEVE Hasbro's second half will be a strong one. Its lucrative Magic: The Gathering game will get a new version launch in the second half of this year. Inventory levels at U.S. retailers look lean, particularly for games. And international markets are gradually making up a larger portion of sales, giving overall growth a boost.

Wall Street predicts more strong growth in boys' and girls' toys, flat preschool sales, and modest growth in games. Next year, toys should get a lift from Avengers,Jurassic World, and Star Wars movies.

It's not just rising wealth overseas that is spurring toy demand. "Part of it is basic infrastructure—things like malls and multiplexes that allow us to reach more consumers with products and stories," says Goldner. Hasbro should have years of healthy growth ahead, and solid returns for shareholders. The stock sells for 16.3 times this year's earnings estimate of $3.22 a share. That puts it on par with Mattel, even though over the past decade, on average, Hasbro stock has sold for a 7% premium.

Earnings per share are expected to hit $3.56 next year and $3.84 in 2016, and both numbers have been creeping higher this year. A 17% rise over the next year for Hasbro stock would put it at just over $61, or 16 times the latest forward-year earnings estimates. There's also the dividend. Payments have grown at a compounded average rate of 22% a year over the past 10 years.

The Bottom Line

Hasbro could return 20% in a year, including its 3.3% yield. The toy maker has upped its payout 22% a year, compounded, for a decade.

AS FOR MATTEL, its problems seem largely self-inflicted. Barbie is losing share to some of Mattel's own toys—Monster High dolls and Disney-licensed dolls, including from the blockbuster movie Frozen. But those toys carry much lower profit margins than Barbie, which helps explain why Mattel's profits are falling faster than its sales. Barbie's sales stumble stems in part from Mattel's decision a decade ago to compete head-on with more provocative doll lines like Bratz by becoming edgier, says Piper Jaffray analyst Stephanie Wissink. "I think parents are reluctant to engage in those play patterns," says Wissink. "They want imaginative play and innocence."

It probably doesn't help that Barbie is best known for her Malibu Dreamhouse and an endless shoe collection so soon after a housing crash and deep recession. My Little Pony, meanwhile, is best known for the tag line "Friendship Is Magic."

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